The complexity and fast-moving nature of digital markets make it difficult for regulators to address the barriers to entry for new and challenger firms which exist as a result of the tendency for such markets to be dominated by a small number of firms. However, the Competition and Markets Authority (CMA), the UK’s principal authority responsible for competition and consumer protection, and the UK Government, are very much alive to this challenge.
The Digital Markets, Competition and Consumers (DMCC) Bill, which is currently before Parliament, and CMA enforcement activity in relation to digital markets, are targeted at Big Tech companies like Amazon, Apple, Google and Meta. However, challenger firms and tech start-ups alike have an interest in understanding the changing regulatory landscape.
About the DMCC Bill
The DMCC Bill creates a pro-competitive regime for regulating digital markets. It grants the CMA and the new administrative function within the CMA, the Digital Markets Unit (DMU), significant powers to regulate companies falling within its scope.
We discuss the DMCC Bill in other briefings:
The focus of this briefing is on the changes that it makes to the UK merger control regime, in particular the rules relating to transactions involving firms (to be) designated as having Strategic Market Status (SMS) ie, companies that have substantial and entrenched market power and a position of strategic significance in relation to digital activity linked to the UK.
Changes to the UK merger control regime
The UK merger control regime will remain voluntary and non-suspensory (subject to the CMA’s ability to “call-in” transactions that are not notified and its discretion in applying the “share of supply” test). However, the DMCC Bill makes the following changes that will enable greater scrutiny of “killer acquisitions” (which would otherwise fail to meet the turnover test due to the typically low turnover of tech start-ups):
- A new mandatory reporting requirement for SMS firms to notify the CMA about the acquisition of businesses and joint ventures which undertake activities in the UK or supply goods/services to persons in the UK, when increasing their share or voting rights above 15%, 25% or 50%, and the consideration provided is at least £25 million.
- Where a transaction by an SMS firm is subject to the mandatory reporting requirement, completion will be on hold (for at least five working days) until the CMA has decided whether to investigate it.
- An acquirer-focused threshold enabling the CMA to investigate transactions where:
- one party has a share of supply of at least 33% of any goods or services in the UK
- that same party has a UK turnover of more than £350million, and
- another party is a UK business or body, which carries on at least part of its activities in the UK
Meanwhile, the following changes will reduce the regulatory burden on smaller businesses looking for growth by merger:
- An increase in the turnover threshold for targets from £70million to £100million
- A safe harbour for small mergers exempting from review any transaction involving parties which each have a UK turnover of less than £10million
Overall, an expanded merger control regime is likely to increase the commercial and legal risk for most parties. Deals involving an SMS firm, or firm with a 33% or more market share acquiring a tech start up, will be subject to enhanced scrutiny by the CMA. This will include more arduous information requests from the CMA, the timing impact of which will need to be factored into the deal timetable, together with the cost and resource implications of having to respond to such requests.
CMA enforcement activity in digital markets
In recent years, the CMA has been investigating a number of concerns about the exercise of market power by Big Tech. In the merger context, this includes the merger inquiry into Facebook (now Meta)/Giphy, approved in June 2023, and the merger inquiry into Microsoft/Activision, in relation to which the CMA recently accepted undertakings in lieu of a reference for an in-depth investigation. Recent investigations into digital markets include: an investigation into Meta’s (formerly Facebook) collection and use of advertising and single sign-on data; investigations into Apple AppStore, Amazon’s Marketplace,and Google’s distribution of apps on Android devices in the UK; and the cloud services market investigation, opened in October 2023 (following a reference to the CMA by Ofcom).
This non-exhaustive list illustrates how the CMA is prepared to investigate where there may be competition issues. This is set to continue with the increase in resources/expertise through the DMU and enhanced powers of the CMA/DMU under the DMCC Bill.
The DMCC Bill is expected to become law in Spring 2024, from which time there will then be a period for implementation. It is anticipated that the CMA will be ready to designate SMS firms very shortly after the DMCC Bill is passed. The increased scope for scrutinising “killer acquisitions” will have implications for tech start-ups. How tech start-ups decide to make use of the new regime will depend on their individual objectives, but it is worth all tech start-ups understanding the new rules and how they might impact on their short- and longer-term plans.
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